Because of two
colliding printing conventions, English grammarians long ago decided to
regularize spelling of pronouns in two important, completely different
situations, by changing the apostrophe rule we use when making possessives from
nominative (i.e., "regular") nouns. Ordinarily, when a noun "owns"
something, we add an apostrophe and an "s" to indicate the noun is possessive,
like this:

The computer's hard drive burned out.

If we replace the
noun ("computer") with the pronoun "it," trouble begins for the unwary speller.

Pronouns cause
problems because they also can use apostrophes to indicate a contraction of a
noun+verb combination when the verb is a form of "to be," as in "I'm" for "I
am" and "it's" for "it is" and "they're" for "they are." Because
grammarians hate unintentional ambiguity (and you should, too), they decided
that all possessive pronouns would be spelled without apostrophes, reserving the
apostrophe only for indicating the contraction of the pronoun and a verb form of
"to be." Usually, this is not a spelling problem for most English writers.
Three of the pronouns cause all the trouble because they sound alike but are
spelled and mean differently. Memorize this list, and you will
eliminate a lot of wasted negative teacher comments and needless reader
confusion.

Possessive (always followed by a noun)
Contraction (always containing the verb "to be" and followed by the rest of the
predicate)